Mooring Capital Fund, LLC v. Comstock North Carolina, LLC, 111309 NCSUP, 07 CVS 20852

Docket Nº:07 CVS 20852
Opinion Judge:Jolly, Judge.
Party Name:MOORING CAPITAL FUND, LLC, Individually and derivatively as minority member of COMSTOCK NORTH CAROLINA, LLC, a North Carolina Limited Liability Company, Plaintiff v. COMSTOCK NORTH CAROLINA, LLC, a North Carolina Limited Liability Company, COMSTOCK SERVICE CORP, INC., a Virginia Corporation, and COMSTOCK HOMEBUILDING COMPANIES, INC., a Delaware...
Attorney:The Law Office of Horack, Talley, Pharr & Lowndes, PA by D. Christopher Osborn, Esq. and John W. Bowers, Esq. for Plaintiffs Mooring Capital Fund, LLC, Individually and derivatively as minority member of Comstock North Carolina, LLC, a North Carolina Limited Liability Company. The Law Office of R...
Case Date:November 13, 2009
Court:Superior Courts of Law and Equity of North Carolina
 
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2009 NCBC 26

MOORING CAPITAL FUND, LLC, Individually and derivatively as minority member of COMSTOCK NORTH CAROLINA, LLC, a North Carolina Limited Liability Company, Plaintiff

v.

COMSTOCK NORTH CAROLINA, LLC, a North Carolina Limited Liability Company, COMSTOCK SERVICE CORP, INC., a Virginia Corporation, and COMSTOCK HOMEBUILDING COMPANIES, INC., a Delaware corporation, Defendants

No. 07 CVS 20852

Superior Court of North Carolina, Wake

November 13, 2009.

The Law Office of Horack, Talley, Pharr & Lowndes, PA by D. Christopher Osborn, Esq. and John W. Bowers, Esq. for Plaintiffs Mooring Capital Fund, LLC, Individually and derivatively as minority member of Comstock North Carolina, LLC, a North Carolina Limited Liability Company.

The Law Office of Ragsdale Liggett, PLLC by Walter L. Tippett, Jr., Esq. for Defendants Comstock North Carolina, LLC, a North Carolina Limited Liability Company, Comstock Service Corp, Inc., a Virginia Corporation, and Comstock Homebuilding Companies, Inc., a Delaware Corporation.

ORDER ON MOTION TO DISMISS, MOTION TO STAY AND MOTION FOR APPOINTMENT OF RECEIVER

Jolly, Judge.

THIS CAUSE, designated a complex business case by Order of the Chief Justice of the North Carolina Supreme Court, pursuant to N.C. Gen. Stat. § 7A-45.4(b), and assigned to the undersigned Special Superior Court Judge for Complex Business Cases, by order of the Chief Special Superior Court Judge for Complex Business Cases, is before the court upon (a) the Defendants' Motion to Dismiss the Amended Complaint ("Motion to Dismiss"), pursuant to Rule 12(b)(6), North Carolina Rules of Civil Procedure ("Rule(s)"), or in the Alternative, for a More Definite Statement ("Motion for a More Definite Statement"), pursuant to Rule 12(e); (b) Defendant Comstock North Carolina, LLC's Motion to Stay Proceedings Pursuant to N.C. Gen. Stat. § 57C-8-01(b) ("Motion to Stay"); and (c) Plaintiff's Motion for Appointment of Receiver(s) Pursuant to N.C. Gen. Stat. § 57C-6-02.2 (the "Receiver Motion" or "Plaintiff's Motion")(hereinafter, references to the North Carolina General Statutes will be to "G.S."); and

After considering the arguments, briefs, other submissions of counsel and appropriate matters of record, as discussed infra, the court concludes that with respect to the Plaintiff's respective Claims for Relief ("Claim(s)") alleged in the Amended Complaint, Defendants' Motion to Dismiss should be DENIED; Defendants' Motion for a More Definite Statement should be DENIED; Defendants' Motion to Stay should be DENIED; and Plaintiff's Motion for Appointment of Receiver should be DENIED.

I. THE PARTIES

[1] Plaintiff Mooring Capital Fund, LLC ("Plaintiff") is a limited liability company ("LLC") organized and existing under the laws of the State of Delaware, with its principal place of business in Vienna, Virginia.

[2] Defendant Comstock North Carolina, LLC ("CNC") is an LLC organized under the laws of the State of North Carolina with its principal place of business in Wake County, North Carolina.

[3] Defendant Comstock Service Corp., Inc. ("CSCI") is a corporation organized under the laws of the State of Virginia, currently or formerly doing business in Wake County, North Carolina.

[4] Defendant Comstock Homebuilding Companies, Inc. ("CHCI") is a corporation organized under the laws of the State of Delaware, currently or formerly doing business in Wake County, North Carolina. Defendant CHCI is the majority member of CNC and by virtue of a merger or acquisition is the successor-in-interest to CSCI as manager of CNC ("Manager").

II. PROCEDURAL BACKGROUND

[5] On December 27, 2007, Plaintiff filed a Complaint against Defendants alleging four Claims for Relief ("Claim(s)"): First Claim (Declaratory Judgment); Second Claim (Accounting and Inspection of Corporate Records); Third Claim (Derivative and Individual Action for Breach of Fiduciary Duty, Duty of Good Faith and Duty of Loyalty and Due Care); and Fourth Claim1 (Dissolution/Frustration of Minority Shareholder Expectations).

[6] On March 14, 2008, Defendants filed their initial Motion to Dismiss the Complaint.2

[7] On April 2, 2008, Plaintiff filed an Amended Complaint, also alleging four Claims: First Claim (Declaratory Judgment); Second Claim (Accounting and Inspection of Corporate Records); Third Claim (Derivative and Individual Action for Breach of Fiduciary Duty, Duty of Good Faith and Duty of Loyalty and Due Care); and Fourth Claim (Dissolution/Frustration of Minority Shareholder Expectations). Hereinafter, the court will refer to the Amended Complaint as the "Complaint".

[8] On April 17, 2008, Plaintiff filed the Receiver Motion.

[9] On May 2, 2008, Defendants filed their Motion to Dismiss and their alternative Motion for a More Definite Statement.

[10] On May 2, 2008, Defendants also filed their Affirmative Defenses and Answer to the Amended Complaint.

[11] On May 15, 2008, Defendants filed their Motion to Stay.

[12] The respective Motions have been briefed, argued and are ripe for determination.

III. FACTUAL BACKGROUND

Among other things, the Complaint alleges that:

[13] Beginning in December 2000, Plaintiff became a minority member of CNC by making investments of $125, 000 and $50, 000 in December 2000 and July 2001, respectively. Plaintiff is a "Priority Member" of CNC, as defined in a Second Amended and Restated Operating Agreement (the "Operating Agreement")3 dated December 31, 2000. The Operating Agreement governs CNC's operations.

[14] The Operating Agreement provides that 45 days after the close of each fiscal quarter, the Manager shall provide Members with internally prepared un-audited income statements and balance sheets.4 In addition, the Manager is required to distribute annual income statements reviewed by an independent accounting firm to Members no later than the 30th day of May the following year, and monthly sales reports no later than 30 days after the end of each month.5

[15] Despite repeated requests, Plaintiff has not received the following materials or documents:6

a. Annual income statements reviewed by an independent accounting firm for the years ending December 31, 2003, 2004, 2005, and 2006;

b. Consistent or regular distribution of monthly sales reports (the only one in the current year having been received July 20, 2007, following a specific request); and

c. Consistent or regular distribution of quarterly statements (the last having been received for the quarter ending March 31, 2007).

[16] Based on the internal statement provided for the year ending December 31, 2006, CNC had profits/retained earnings of $4, 980, 000. This amount of profit would have been sufficient to return the initial capital and pay a 20% per annum cash on cash return to Plaintiff as a Priority Member. However, the Manager has failed to distribute profits to the Priority Members.

[17] Moreover, CHCI purchased certain other Priority Members' interests at a 6.5% per annum cash on cash return, whereas actual profits would have provided a substantially higher return. Based on profits and retained earnings, CNC should have been able to return the initial capital and pay a 20% per annum cash on cash return to the Priority Members.

[18] Though no distributions have been made to the remaining Priority Member, the Manager appears to have made unauthorized distributions to itself and affiliated entities, as indicated on the internal statement for the year ending December 31, 2006. This statement indicates net distributions to CHCI and CSCI of $1, 781, 000, while the Manager should instead have contributed on a net basis $2, 342, 000 in cash to purchase the equity interests of Priority Members other than Plaintiff.

[19] CHCI and CSCI have caused CNC to operate for their own benefit and protection and without regard to the interests of minority members, including Plaintiff.

[20] CHCI and CSCI are or have been acting as manager of CNC and have failed to take action to enforce the rights and properly represent the interests of CNC and its individual members.

[21] CHCI and CSCI have grossly mismanaged CNC, by according themselves preferential treatment either in the repurchase of other equity interests in the company, or in the taking of compensation or profit to the detriment of Plaintiff and other minority members.

[22] Neither CHCI nor CSCI has made any distributions to Plaintiff as a Priority Member of CNC. Instead, CHCI and CSCI intentionally made wrongful and unauthorized distributions of CNC funds to themselves or related entities in violation of the terms of the Operating Agreement. The acts and omissions of CHCI and/or CSCI were in bad faith, outside the scope of authority granted under the operating agreement, in direct conflict with and against the best interests of CNC, and have resulted in CHCI and/or CSCI deriving an improper personal benefit.

IV. THE MOTIONS

A. Defendants' Motion to Dismiss -- Rule 12(b)(6)

[23] The Motion to Dismiss seeks dismissal of the Amended Complaint, in part or in whole, pursuant to Rule 12(b)(6).7 Dismissal of an action pursuant to Rule 12(b)(6) is appropriate when the complaint fails to state a claim upon which relief can be granted.

[24] When deciding a Rule 12(b)(6) motion, the well-pleaded allegations of the complaint are taken as true and admitted, but conclusions of law or unwarranted deductions of facts are not admitted. Sutton v. Duke, 277 N.C. 94, 98 (1970).

[25] A complaint fails to state a claim upon which relief can be granted when either (a) the complaint on its face reveals that no law supports the plaintiff's claim, (b) the complaint on its face reveals the...

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